Business Law FAQS
Q: What is business law?
Running your own business demands a lot of perseverance and determination. This often leaves little time to deal with the legal issues that constantly permeate running small businesses. Having a business law attorney on your side can make a big difference in the day-to-day operations of your business, helping you deal with a wide range of issues related to:
- Business formations;
- Acquisitions and mergers;
- Employment/labor laws;
- Contract negotiations; and
Here are some helpful resources:
Q: What factors should be considered in choosing the type of business form for my business?
According to the Internal Revenue Service, all businesses fall into one of five basic structures that define how it is organized, how it operates, and how it is taxed, and liability issues. Each structure has its own benefits and drawbacks, and what works for one company may prove disastrous to another. Learning the differences between business structures can help an entrepreneur successfully plan his company:
Sole proprietorship: A sole proprietorship is the simplest business structure. It allows a person to conduct business as themselves. Under this structure the owner and his or her company are viewed as one and the same. While this is an easy way to start doing business, it is important to be aware that a sole proprietorship does not protect the owner from any business liabilities.
Partnership: A partnership is a simple business structure for businesses with more than one owner. There are two types of partnerships: general partnerships and limited partnerships. When considering this business structure, understand that owners maintain personal liability for the business. In a limited partnership, the limited partners may have limited liability.
Corporation: Forming a corporation establishes a business as a separate legal entity, providing owners with limited liability protection. There are two types of corporations: C-corporations and S-corporations. There are several key differences between these two types of corporations, including tax issues and shareholder restrictions.
Limited Liability Company: Limited liability companies are separate legal entities from their owners, but allow owners to report business gains and losses on their own personal tax returns. Owners are shielded from business liabilities under this structure. In Arkansas LLCs can elect to be taxed as a C-Corp, S-Corp, Sole Proprietor, or Partnership.
Q: What is the difference between a subchapter C and S corporation?
In the end, C-Corps and S-Corps are very similar. The following traits are common to both:
Liability Protection: Shareholders are generally not responsible for business debts or business liability. Liability protection can be sacrificed, however, if the company does not remain compliant.
Corporate Structure: Unlike LLCs, corporations must have a structure that breaks down into shareholders, directors and officers.
- Shareholders own the company. They elect the board of directors
- Directors oversee larger issues, such as corporate goals, affairs, and decision-making. They elect officers
- Officers deal with day-to-day business affairs.
Corporate Documents and Compliance: Both need to file certain documents with the Secretary of State in Arkansas. Typically, these are the Articles of Incorporation. Furthermore, corporations have obligations such as issuing stock, paying fees, adopting and enacting bylaws, and holding shareholder and director meetings (as well taking meeting minutes at these meetings).
The main differences between the two fall into three categories: ownership, shareholder rights, and taxation.
Ownership: C-Corps allow unlimited amounts of shareholders and thus are a great choice for larger businesses. S-Corps may have no more than 100 shareholders and these shareholders must all residents of citizens of the United States. Furthermore, while C-Corps can be owned by other corporations, LLCs, or even trusts, S-Corps cannot.
Shareholder Rights: When forming a C-Corp, you can choose to have several different strata of shareholders, ones whose votes count for more or less than other members. Typically, early owners or founders have a more sizable say in voting, and thus, the operation of the business. S-Corps, on the other hand, have just a single type of shareholder. As such, it can be easier for C-Corps to expand, and sell shares, as additional flexibility is a solid advantage.
Taxation: First off, for either entity, personal income tax is paid on dividends salary drawn from the company. That said, C-Corps also pay taxes at the corporate level, while S-Corps, like LLCs, are pass-through entities. What’s all this mean? That C-Corps have a possibility of double-taxation. In a C-Corp, corporate income is taxed at the corporate level, and dividends are taxed at a personal level.
Q: What does it mean to “pierce the corporate veil?”
A key reason that business owners choose to form a separate business entity is so they won’t be held personally liable for business liabilities. However, courts will sometimes hold a business’s owners, members, and shareholders personally liable. When this happens it’s called “piercing the corporate veil.”
Generally, when evaluating if a corporation is legitimate – if the corporate veil should be pierced – courts look at the following factors:
Corporate Formalities: Did the corporation follow proper procedure, for example in its formation and appointment of directors, issuance of stock, the holding of its annual meetings, the filing of annual reports with the state, and the maintenance of its own property, and financial books and accounts? Or were the procedures not followed, was the corporation dependent on property or assets of a shareholder which it did not technically own or control, or were the corporate finances commingled with those of its shareholders?
Individual Control: What amount of financial interest, ownership and control did the principals maintain over the corporation?
Personal Use: Did the principals use the corporation to advance personal purposes?
Q: What is the difference between a joint venture and a partnership?
Most people think of joint venture and partnership business as the same idea. However, they are two agreements that have very clear-cut differences.
A Joint venture involves two or more companies joining in business. In a partnership, it is individuals who join together. When two or more companies engage in a joint venture it is often to overcome business competition. While engaging in a partnership, the individuals involved become partners in an organization to make a profit.
A Joint Venture can be termed as a contractual arrangement between two companies to undertake a specific task. Compare, a partnership involves an agreement between two parties wherein they agree to share the profits as well as take the burden of loss incurred.
Q: What is a non-profit corporation?
When it comes to your business structure you might need to think about organizing your venture as a nonprofit corporation. Unlike a for-profit business, a nonprofit may be eligible for certain benefits, such as sales, property and income tax exemptions at the state level. The IRS points out that while most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level doesn’t automatically grant you an exemption from federal income tax.
Another major difference is the treatment of the profits. With a for-profit business, the owners and shareholders generally receive the profits. With a nonprofit, any money that’s left after the organization has paid its bills is put back into the organization. Some types of nonprofits can receive contributions and those contributions will be tax deductible to the individual who contributes to the organization.
Q: How often should a business hold meetings and update its minutes?
If a business entity undertakes a major change or transaction, then it should be reflected in its minutes. Moreover, the company may want to hold meetings of the shareholders or members, and directors or officers should take place at least annually. Failure to adhere to the formality of regular meetings can jeopardize the business’s ability to shield its officers, directors and shareholders or members from personal liability for the corporation’s actions.
Q: Is it a good idea to have a Buy-Sell Agreement?
In today’s business climate, businesses cannot afford to make mistakes. Yet there is one legal mistake that many small and medium-size businesses often make – they don’t have a buy-sell agreement in place. This can create several big issues. For example: 1) without an agreement in place, a business owner may wake up one morning to find out that a stranger owns part of his business; 2) an owner that is getting ready to retire may find out that he can’t force his company to buy his stock; 3) and perhaps most troubling, the majority owner of a company who wants to sell his or her business may find out the sale is vetoed by his minority shareholders.
These problems can all be avoided if a proper buy-sell agreement is in place. Who needs such an agreement? The answer to that question is easy – any small or mid-sized company that has more than one owner really needs a solid buy-sell agreement. It doesn’t matter whether you are a corporation, partnership or limited liability company. If there is more than one shareholder, partner or member, an agreement should be in place.
Q: How can a properly established business entity such as a corporation shield me from personal liability for business debts and obligations?
Personal liability arising from business obligations can consume the wealth that is tool a lifetime of work to build. The liability may extend to business losses, but other obligations may also reach individuals, including:
- Damage awards in lawsuits
- Tax penalties
- Back wages and benefit payments
Limited liability offered by corporations and other business entities shelters business owners from personal liability. Nonetheless, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.